COVID-19 and

Service area ⁄ Banking and Finance, Corporate Location ⁄ Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Jersey, Hong Kong, Singapore Date ⁄ 13 March 2020

Introduction host your conference because of an outbreak amongst guests? What if movement of goods across a particular border is The coronavirus (COVID-19) outbreak is having a damaging stopped or slowed to a crawl? impact on commercial activities around the world (for both supply and demand). Restrictions on travel and gatherings have either been imposed (e.g. in China, USA and Italy) or are Consider the governing law at least being considered as next steps (by pretty much all The governing law of your will be key, because it governments). Some businesses have already taken steps to determines the interpretation of the contract and the potential limit business travel and participation in meetings and social legal remedies available. Most commercial will state events. what the governing law is. If the contract doesn’t, then there are rules that will help determine this. We expect that most The impact of COVID-19 on business is even more complicated contracts involving Jersey or Guernsey entities and people will than it would otherwise have been, given: (i) the background be subject to Jersey, Guernsey or English law, but equally, there of uncertainty around what a Brexit deal might look like and will be a huge diversity of potentially relevant legal systems whether there will be one at all, (ii) an oil production dispute with e.g. Cayman law trusts, Swiss facility documents, French between OPEC and Russia causing an unprecedented dive in SPAs, Hong Kong law service contracts or New York law oil prices and stock market losses and (iii) uncertainty as to the financial instruments. Local legal advice will therefore be level and availability of lender and government support/ important. forbearance in relation to affected businesses. Reduction in demand in some areas (travel, hospitality) is to a small extent The starting point for contracts off-set in other areas (streaming of video on Netflix, sale of hand cleanser), but clearly there are many losers. A basic principle of contract law is that ‘’ applies. This means that if you have contracted to do something, you It is also a movable feast, so that by the time you read this, any must do it, even if it turns out to be much more difficult or of the above could have moved markedly on, in one direction expensive than expected at the time you entered into the or another, and new factors may have arisen. What we do contract. There are qualifications to this, as with the doctrine of know is that as people struggle to get to work and commerce force majeure (which is where the Jersey law of contract will becomes more difficult to carry out, parties will find it more look, rather than to the English concept of frustration). difficult: (a) to perform their obligations; and (b) to get performance from their counterparties. Force majeure clauses What happens when a borrower says to its bank that it cannot Each contract needs be looked at individually. Identify the service its debt because the COVID-19 outbreak has meant it is relevant terms and assess the facts as they impact upon a unable to service customers? What if the hotel can no longer party’s ability to perform its obligations. Has COVID-19 caused a breach of the contract (or if the COVID-19 outbreak keeps

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BERMUDA BRITISH VIRGIN ISLANDS CAYMAN ISLANDS GUERNSEY JERSEY CAPE TOWN HONG KONG LONDON SINGAPORE careyolsen.com heading in the same direction, is a breach likely?) force majeure event today, may well be one tomorrow, as the impact of COVID-19 develops. Also, whether or not an event For any contract, one should check whether it contains a force constitutes force majeure will depend upon the nature of the majeure clause, and if it does, identify whether it is one that contractual obligation concerned. Only obligations made seeks to define what force majeure means–whether via an illegal or impossible are likely to be relevant. Obligations that exhaustive list or via examples of what force majeure can are simply made more difficult or expensive to perform are mean-or if there is no definition at all. unlikely to be ones to which force majeure would apply.

For context, this is an example short form force majeure clause: Follow any stipulated notification procedure Neither party shall be in breach of this agreement nor liable If a review of a contract reveals that it contains a force for delay in performing, or failure to perform, any of its majeure clause and that COVID-19 could be interpreted as a obligations under this agreement if such delay or failure result force majeure event, a party wishing to rely on that clause to from events, circumstances or causes beyond its reasonable excuse its non-performance should follow all formalities control. In such circumstances [the time for performance shall prescribed under the contract for doing so. The clause is likely be extended by a period equivalent to the period during which to require delivery of a written notice to the other party stating performance of the obligation has been delayed or failed to the affected party’s view that the clause has been triggered. be performed OR the affected party shall be entitled to a Parties should also keep detailed records of the interruption to reasonable extension of the time for performing such their business and details of the factors leading to illegality or obligations]. If the period of delay or non-performance . continues for [•] [weeks OR months], the party not affected may terminate this agreement by giving [•] [days’] written notice to the affected party. Material adverse change/effect (MAC/MAE) The existence of a force majeure clause is not the only Such clauses come in various shapes and sizes (the above is important contractual provision to look out for. Whilst force but one example), but a force majeure clause normally majeure describes external factors or circumstances that excuses a or failure or delay in impinge on a party’s ability to perform its obligations, ‘material performance by a party if it is caused by an event which is adverse change’ or ‘material adverse effect’ (MAC or MAE) outside of that party’s reasonable control. A force majeure has to do with the state of a contracting party itself or the clause commonly also suspends the obligation to perform subject of the contract. A person who has contracted to buy a while the particular force majeure event continues. This means company might claim that it is released from proceeding with that the contract still continues to exist, but (as above) the the purchase if the target company is affected by a MAC/ clause may go on to allow one or either party to terminate the MAE; and a MAC/MAE that affects a borrower (and therefore contract if the circumstances persist for a particular period of may lessen its ability to service a loan) will often be an event of time. default under a credit facility.

This makes sense, as commercial arrangements cannot be A force majeure type situation could of course lead to MAC or suspended indefinitely. MAE, because the same external factors or circumstances that party A might see as a force majeure that promises relief from Is COVID-19 a force majeure event? obligations, could from the perspective of party B (e.g. a The question is whether COVID-19 is a force majeure event. creditor) result in a MAC/MAE affecting party A, permitting it The answer, predictably, is that it depends. to accelerate repayment of the debt party A owes.

It depends partly on the wording of the force majeure clause Despite this, it is not clear that lenders will want to trigger in the contract (if there is one). wholesale defaults indirectly caused by COVID-19. Already, the UK press is reporting that banks are offering flexibility on Contracts may list natural disasters, earthquakes and floods, mortgage repayments, increased overdrafts and credit card fire, riots and other cases of civil unrest, acts of war and limits and relief on cash advance fees to personal customers terrorism. That list changes over time, with terrorism being and SMEs. Quite how the banks will police these offers and added to war, and the 2004 Boxing Day tsunami may have determine who qualifies due to COVID-19 causes remains resulted in tsunamis being specified more widely as a kind of unclear. natural disaster. The fairly recent 2009 H1N1 influenza (swine flu) pandemic (generally understood to mean the worldwide At a commercial level, banks are also likely to look at customer spread of an infectious disease affecting an exceptionally high circumstances on a case-by-case basis. Parties to any type of proportion of the population within a short period) may mean contract should explore other options (just like the banks that disease/pandemic/generic health event wording is mentioned above) including renegotiation, delaying specified in more recent contracts. performance, rescheduling or reducing the burden or speed of delivery. There may be contracts of supply or service where it COVID-19 appears to fit the ‘pandemic’ description, and this will suit both parties to negotiate amendments to a deal has now been confirmed by the World Health Organisation. arrived at prior to the emergence of COVID-19, perhaps The progress of the virus can change quickly, and what is not a because both are suffering its effects.

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2 ⁄ COVID-19 and force majeure careyolsen.com Where there is no force majeure clause in your contract There is some authority under Jersey law for finding force majeure even in the absence of a written provision to this effect. FIND US In the Hotel de France v CIB (1995) case, the Chartered Institute of Bankers (CIB) Carey Olsen Bermuda Limited contracted for the use of a particular room within the hotel in which to hold their 2nd Floor Atlantic House dinner, and a fire at the hotel meant that it was not possible to use that room. Other 11 Par-la-Ville Road rooms were available but the court decided that use of the selected room was “a Hamilton HM11 Bermuda fundamental term” of the contract. The contract did not contain an express force T +1 441 542 4500 majeure clause, but was interpreted by the court as one that was impacted by a E [email protected] force majeure event, making it impossible for the hotel to perform the contract. The court’s approach was to allow the CIB to treat the contract as at an end–either Carey Olsen because of a ‘fundamental breach’ (failure to provide the particular room) or Rodus Building PO Box 3093 because of force majeure. Road Town Tortola VG1110 Accordingly, even without a force majeure clause in the contract, there may be British Virgin Islands mileage, given the right factual circumstances, in arguing an effect much like the fire T +1 284 394 4030 in the Hotel de France case – i.e. that COVID-19 presents a set of circumstances that E [email protected] make it impossible for a party to deliver up or perform that which it has contracted to do. Perhaps the most obvious candidate type of circumstance, given the virus affects Carey Olsen humans (either because they get the disease or because they have to be confined PO Box 10008 Willow House due to preventative measures) could be where a contract is for personal services Cricket Square Grand Cayman –e.g. one contracts for the services of a particular artist, musician, artisan, adviser, KY1-1001 Cayman Islands athlete, personality or performer. T +1 345 749 2000 Other advice E [email protected] • Consider the facts. Is an event or service illegal or impossible to perform? Carey Olsen (Guernsey) LLP Remember that mere difficulty of performance, or increased cost of performance, PO Box 98 Carey House or the contract being less lucrative (renting a venue to put on a show that now Les Banques St Peter Port may sell poorly) will not, in and of itself, be sufficient to invoke force majeure. Guernsey GY1 4BZ • Consider the contract. The terms of each contract and its governing law should be Channel Islands considered. Is there a MAC/MAE or force majeure clause? T +44 (0)1481 727272 • Monitor the situation. Governmental steps to ban gatherings or travel or other E [email protected] steps that have an impact upon a party’s ability to perform may go toward justifying relief. Carey Olsen Jersey LLP • Check whether you are insured. An alternative source of relief could be being able 47 Esplanade St Helier to claim on business interruption . Jersey JE1 0BD Channel Islands • Renegotiate. Is the other party similarly affected by COVID-19, directly or T +44 (0)1534 888900 indirectly? Parties may find themselves on both sides of the problem and be open E [email protected] to compromise or rescheduling.

Economic Substance Recent legislation in all of the jurisdictions in which Carey Olsen operates means that many companies need to demonstrate substance in those jurisdictions. This includes FOLLOW US holding an appropriate number of board meetings within the relevant jurisdiction in order to meet the economic substance rules. The failure of Flybe in the UK, growing restrictions on crossing of borders (Italy/China), self-isolation and understandable reluctance to transit through airports means that flying to board meetings is Visit our corporate team at unwelcome for new reasons. We can help by sourcing alternate director services and careyolsen.com are ready to continue to assist with all substance queries.

13 March 2020

PLEASE NOTE This briefing is only intended to provide a very general overview of the matters to which it relates. It is not intended as legal advice and should not be relied on as such. © Carey Olsen 2020

3 ⁄ COVID-19 and force majeure careyolsen.com